Sunil Jain: Maruti 'getz' it in the neck

RATIONAL EXPECTATIONS

At the outset, I must confess I've been one of those who've consistently sided with Suzuki Motor Corporation in its fights with the government right since the mid-90s.

And with good reason, since all the government was really doing was play politics with Maruti Udyog Ltd, preventing it from expanding, and at one point even getting joint secretaries in the ministry to approve Suzuki's choice of engine for the M800!

Indeed, when the sell-off talks failed with the government wanting at least Rs 2,200 crore for its stake and Suzuki offering to pay just a tenth, I wrote a piece citing the fact that the Tatas paid Rs 1,439 crore for getting control of VSNL, a company that, like Maruti, was once a monopoly, but had two times Maruti's profits on a similar sort of turnover.

Anyway, Suzuki's strategists proved to be the smartest of all, and structured a deal whereby they got control of Maruti at Rs 1,200 crore, but the government was happy since it got another Rs 993 crore from the Indian public (and so reached its Rs 2,200 crore target), and the possibility of a lot more in a few years (based on last week's prices of Maruti's share, the government's 18 per cent stake is worth around Rs 1,800 crore).

Needless to say, after this long preamble, I'm still taken aback by Suzuki's proposal, announced summarily in Japan, to cut the ground under Maruti's feet""the proposal was to set up a diesel engine plant (earlier supposed to have been set up by Maruti) and manufacture cars in a new plant, leaving Maruti to earn only whatever marketing margins Suzuki chose to give it on new models.

Indeed, since Suzuki representatives had earlier toyed with the idea of setting up Suzuki marketing networks, even Maruti's marketing profits looked a bit iffy.

Naturally, Maruti's share prices reacted violently. But all this, we're now told by a government that came down on Maruti like a ton of bricks, is in the past as Maruti will now have a 70 per cent share in the new car plant and a 49 per cent stake in the diesel engine one.

Indeed, the government is either so sure of this, or it just wants to reassure the "aam" investor that it has announced it will not exercise its "put" option, which would force Suzuki to buy out its remaining stake.

Two questions arise immediately. One, is Maruti indeed out of the woods, and two, was the government right in using what's called Press Note 18 to get Suzuki to fall in line?

To tackle the second question first, most recognise that Press Note 18 is both unfair and irrelevant today. It's unfair since it gives virtually blackmail power to the local partner without whose OK the foreign partner cannot set up a new venture in the country""so, Suzuki needed the government's OK to set up the new plants.

More important, now that India is making imports much easier and is signing up FTAs like the one with Thailand, foreign partners can just as well set up overseas plants to service the local market, thereby not just obviating the need for a Press Note 18 approval, but also robbing the country of potential investments in the bargain.

While there can be no doubt that Press Note 18 was used correctly and effectively in this case, what's ignored is that since Suzuki's actions violated other laws, it could have been caught on these as well, and so the government didn't really have to play the heavy.

Since Suzuki's actions hurt Maruti, this was a clear violation of the joint venture agreement where Suzuki committed to strengthen Maruti. It was a violation of the listing agreement since price-sensitive disclosures were made without informing the stock exchanges and it was an oppression of the minority shareholder, which is actionable under the Company Law.

As to whether Maruti's future is now secure, I'm not too convinced by the arguments made (by Managing Director Jagdish Khattar, for instance) that Maruti's real story starts now because it has a 55 per cent market share, even though a fifth of the market is out of bounds for it as it is dieselised""so, once the diesel engines start, its market share will soar.

While that is something only time will tell, to use the old cliche, it's likely new models will get manufactured only by the joint venture. Immediately, all benefits of depreciation go to the JV and not to Maruti.

Since Suzuki will still control things (since it owns 54 per cent in Maruti, it controls 68 per cent of the JV, not 30), there is lack of clarity on what prices it will transfer the cars to Maruti for selling""it is also not clear as to who will take the hit for the discounts that invariably have to be offered on new models in a competitive market.

There is also a considerable question mark over Maruti's future as an exporter since it is very clear this depends upon Suzuki's goodwill, and that is now increasingly in doubt.

In the event, the government would be wise to exercise its "put" option, and force Suzuki to part with some real money to buy out its remaining stake. Alternatively, it should consider picking up an additional 8 per cent stake from the market to ensure someone has veto power to keep Suzuki in check.

Postscript: I have before me a report from Edelweiss Capital, downgrading Maruti after the compromise solution. Keep a watch for what other analysts have to say.

suniljain@business-standard.com